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Chris Gosselin, CEO of Australian Fund Monitors, speaks with Monik Kotecha Chief Investment Officer at Insync Fund Managers. Insync Fund Managers operate two funds, the Insync Global Capital Aware Fund (hedged) and the Insync Global Quality Equity Fund (unhedged). The two funds have the same strategy, the only difference being that one is hedged and the other is unhedged.

The Insync Global Capital Aware Fund was started in October 2009 and since then has returned +11.43% p.a. with an annualised volatility of 9.90%. Over the same period, the Insync Global Quality Equity Fund has returned +13.38% p.a. with an annualised volatility of 10.64%.

Funds operated by manager:
Insync Global Capital Aware Fund
Insync Global Quality Equity Fund

One Year On - What Did We Learn?

Marcus Padley, MarcusToday 

29th March 2021

It is a year since the bottom of the market on March 23, 2020. Since then, the ASX 200 is up 54.44% if you bought at the absolute low and sold today. 

What a year of opportunity.

The 54% is a fantasy of course - no-one bought at the bottom, or could be expected to have bought at the bottom and amazingly, if you bought just a week after the bottom, the market is up 26.7%, less than half the 54% - what a difference a week makes in volatile times.

Here are some of the best and worst performers over the last year. Lets see if we can learn something from a year of pandemic hindsight. All these tables have been derived from our Marcus Today All Ordinaries spreadsheet. 

I have included the one-year performance column and a few other columns as you can see, in particular the PE, Yield and Revenue Growth. The reason for including those is to highlight how you simply would not have picked these stocks on basic fundamentals - the best performers are not necessarily profitable or cheap, and most of them offer no yield at all. 

TOP 100 - Top 20 performers in the biggest 100 stocks: 

TOP 100 - Worst 20 performers in the biggest 100 stocks: 

NEXT 100 - Top 20 performers in the next biggest 100 stocks: 

NEXT 100 - Worst 20 performers in the next biggest 100 stocks: 

ALL ORDINARIES - Best 20 performers in the All Ordinaries Index: 

ALL ORDINARIES - Worst 20 performers in the All Ordinaries 

15 GOLDEN RULES FROM THE PANDEMIC - Here are some of the lessons from these lists. Observations about sharp market corrections and the recovery.

1. Some of the best bits of the market are the exponential bits ahead of a correction. You have to participate in those exuberant moments or you'll never get the averages, not be too fearful or cautious. Enjoy the exuberant bits. Play the game when its "on". Laugh all the way to the top. Let the finger-waggers wag, they always do when people make a fortune with little effort.

2. Corrections are inevitable and regular. Expect a big one every ten years (50%), and a tradeable one every three years (10-20%).

3. Corrections come quickly. You don't have much time to react. You have to be decisive.

4. Recoveries come slowly. It's a year from the correction and what we lost in 23 trading days we still haven't recovered. You have plenty of time in the recovery, plenty of time to decide when and what to buy. There's no rush. You never have to catch the knife. The market never crashes up. You do not have to catch the bottom.

5. If you ever say "I can't buy it, it's gone up 10% in a week" you will fail at investment. If you are the sort of investor who says "it's up 100%, I've missed it", you doom yourself to conservatism. Chickens don't make money. You will never buy a ten bagger. Forget APT up 780% in a year. Eleven stocks in the All Ordinaries have been ten baggers (up over 1,000%) in the last year. 180 stocks (36% of the All Ordinaries index) have doubled, 290 (58%) are up more than 50%. Percentages are big in a correction and a recovery. Do not be scared of big percentages. You can buy stocks that have gone up, but in a recovery you have to buy stocks that have gone up.

6. No-one knows when corrections are coming and those that did, didn't know for sure, they just made a fuss when they discover (in hindsight) that they made the right noises at the right time.

7. Do not think you will be so clever as to predict the end before it happens. You can't predict the big sell-offs, just be aware (as now) when some of the ingredients are in place (money printing, excessive debt, rising rates, overvaluation) but don't do anything about the signs of a market correction until the correction begins. We are in the reaction game not the prediction game. Yes, become more sensitive to the signs the more stupid it gets, but still....wait. And when the precipitous signals turn into a precipitous market, you'll be ready to be decisive.

8. Corrections are great! They are to be welcomed as an opportunity. Do not fear them, welcome them.Best moments in the market, but not if you pull out, stay out, or deny its happening.

9. No-one will ever tell you to sell. No-one in the industry wants you in cash. They want you in their fund, in their product; trading, speculating, active. To go to cash through a professional will require you to be assertive. To go to cash as an individual seems like a big decision, but really, its not.

10. Cash is always king. There is nothing wrong with cash, ever. Even if you get the timing terribly wrong all you miss is "not making money". You can wear that whilst you think. Being in cash is riskless. You have all the power. You can buy tomorrow. Do not be fearful of going to cash. It's no biggie. It's actually very cathartic, especially when things get wild.

11. Catching the bottom of a correction is all about sentiment. When everyone has lost faith in/sight of fundamentals, you need skills reading the herd not the numbers. Watch the herd, don't join the herd. Look at the tables above, at the best recovery stocks and their PEs and Yields. Warren Buffett could not have picked those stocks on the numbers. Most of the best stocks combined zero yields and were loss-making. Read the herd not the numbers. Fundamentals are useless when it comes to timing the market. Its why value investors always emphasise the long term, because they are useless at the short term. "Its a weighing machine not a voting machine" is just an excuse for giving up on timing the market.

12. At extreme moments the market drives all, sinks all boats, lifts all boats. Focus all your attention on identifying the "Pivot Point" in the market. In corrections the woods are on the move, forget the trees until the forest is going up again.

13. Stock selection comes second to the market. After the market pivot point, stock selection is about where you will make the most money, but you have to get the market right first. If  you get that right you'll make money in everything.

14. The recovery will come fastest and hardest in the stocks that have suffered the most extreme sentiment swings. In the last year Qantas, Stockland, EDP Education and Virgin were not the stocks with the best fundamentals (far from it), they were stocks that got the most oversold, so rebounded the most. The money is in identifying and timing the extremes of sentiment in stocks as well.

15. Don't bother to buy defensive stocks when the correction starts. Do you remember A2M, FPH, TLS and WOW performing better than the rest of the market when the market fell over. They had a "moment" of outperformance. But in the recovery they have been some of the worst performers. Defensive stocks will not serve you well at any time. Leave them to the fund managers that concern themselves with their own relative, not actual, performance. For an individual investor there is almost no point at which you would want to buy a "defensive" stock. They make less money in the recovery and there is no point holding the stock that loses you less money in a correction.

At the end of the day the pandemic year has been great for us as investors. It has been a year of fabulous opportunities. Hopefully you played the game. Look forward to the next great correction. Hopefully we`ll all have the vigilance, experience and courage to exploit it, not run from it. 

Funds operated by this manager:

Marcus Today Equity Income SMA, Marcus Today Growth SMA 

Are rates barking or biting?

John Abernethy, Clime Asset Management

11th March 2021

In calendar year 2020, the US Treasury issued US$4.4 trillion of new debt to undertake and fund its "rescue and recovery" plan for the US economy. 

Of the bonds that were issued, only 5.2% (US $200 billion) were bought by traditional non-US (foreign) buyers. Meanwhile, the US Federal Reserve (the Fed) bought US$2.4 trillion (54%) or an average of US$197 billion per month as it reignited a new and sustained QE program.

For calendar 2021, the Fed has now indicated its intention to buy bonds at a rate of US$80 billion per month. However, pundits and market players are concerned because this rate of buying seems too low. This is particularly so given the anticipated passing through the US Congress/Senate of the US$1.9 trillion Biden "rescue" program and perhaps up to another US$3 trillion of "recovery" fiscal stimulation ("build back better" infrastructure investment) that is being proposed for later in the year.

The above may amount to the world's largest sustained fiscal stimulus of all time. Consequently it will also require the support of the largest QE of all time and this is what is weighing on the long dated US bond markets. Should the Fed not introduce a program of higher and more sustained QE along the yield curve (even past 10 year duration), then long bond yields will probably rise further.

Whilst inflation is flagged as a risk for bond yields, it is not that big an issue at present with an excess supply of both labour and energy dampening inflation. Rather, it is primarily the excessive supply of bonds to fund extraordinary fiscal expenditure that is driving long dated yields higher.

However, the massive fiscal plan has led to upgrades in the outlook for US growth in 2021. Recently some major US economists have forecast that gross (or pre-inflation) GDP growth will be 7% in the US. This forecast begs the question: How significant will inflation be in this gross GDP outcome? Our view is: not much - maybe 1.5% - but we also doubt that 7% growth can be achieved.  The complete COVID vaccine rollout will take at least 4-6 months to occur and the infrastructure investment is really a 2022 story and beyond. The US will recover but not as quick as many suggest.

The rolling US fiscal program seems based on Modern Monetary Theory (MMT). As discussed previously in these pages, MMT argues that governments create new money by using fiscal policy, and that the primary risk once the economy reaches full employment is inflation, which can be addressed by gathering taxes to reduce the spending capacity of the private sector. If unemployment is too high, then this is a signal that the Treasury or the Fed is overly restricting the supply of financial assets needed to pay taxes and satisfy the desire for savings. It would appear that the Biden Administration firmly believes that with unemployment still very high, there are few bounds to fiscal stimulation and that the Fed will maintain QE at a sustained rate.

This point is totally lost in the political debate across the world. Indeed, if for a moment we think about the current monetary and fiscal policy settings in Australia, we see a disconnection between the policy makers (Treasury and the RBA) and the politicians.

For example, in the last week we have had a Royal Commission declare that Australia's aged care system is broken. The response from the Government is that we must increase expenditure in this area and that it may be best to fund it with an income tax surcharge. That begs the obvious but uncomfortable question - Why not just increase Commonwealth borrowings and fund Aged Care investment inside the QE policy?

At some point, the politicians need to focus on this issue. Also the bureaucrats need to share their analyses of the logic and sustainability of QE or MMT. The average Australian may soon question why QE that funds "JobSeeker" or "JobKeeper" is fine, but a substantial investment in aged care, healthcare and general public infrastructure is not?

Moving back to the US, we see the surge in expenditure in the Biden program below as the new Administration revisits and resets the programs that were originally set in March 2020 as COVID commenced.

The explosion of the Fed balance sheet is shown below as it lifted from about US$3.5 trillion in assets to over US$7.5 trillion last week. Based on the projections above, it may well reach US $10 trillion by year's end (or about 40% of US GDP). At that point, the Fed would own about 35% of all US bonds on issue.

The effect of sustained QE is well observed. Bond yields are held down and the rates that would exist in a "free market" - where Central Bank interference does not occur - are absent. A free market would see bond yields affected or influenced by economic activity, inflation expectations and the credit quality of the issuing government as measured by its fiscal responsibility.

The graph below compares global manufacturing activity (Purchasing Managers Index or PMI) to US bonds, and shows that bond yields are particularly low on this measure. Since the GFC it has been a fairly good tracker, but during COVID the relationship has broken down with the massive US QE program artificially suppressing yields.

That is not to deny that bond yields have risen lately. However, across the world yields are rising back to where they were prior to the COVID crisis - and that is to be expected. It is not alarming; rather, it is logical.

The above chart shows that Australian 10 year bonds have moved above their pre-COVID levels despite the RBA introducing QE. The reason for this is because the RBA program is very focused on the short end. It originally (in March 2020) targeted 3 year bonds at 0.25%, until November 2020 when it reduced the target for 3 year bonds to the same as the official cash rate, namely 0.10%.

It is likely that the RBA will expand its QE program and move into the 10 year bond market at some point. It is truly perverse that Australian 10 year bonds yield 2% higher than German bonds - which are still trading with a negative yield!

The next chart takes a slightly longer look at Australian bond yields. In early 2018, three year bond yields were over 2% and therefore substantially higher than today's ten year bond yield. The compression of three year bond yields to slightly above the 0.1% target by the RBA is a major reason why investible cash will continue to flow towards the Australian listed yield market.

The next chart shows that US ten year bond yields have now moved above the S&P 500 dividend yield. So is this a problem for markets? Our view is "No" because the dividends that will flow from the US economic (and world) recovery will grow, and will be far superior to the static and controlled yields of the bond market. We regard the chart as interesting but not persuasive.

The sustained decline in bond yields driven by QE programs had an outsized effect on returns generated by all bond indices. The return for Australian asset classes is shown below and it is observable that Australian bonds delivered an extraordinary return compared to Australian shares. The return on so-called low risk assets (bonds) should not be the same as the return on risk assets (equities).

Based on historical data the chart above, in our view, suggests a relatively strong outlook for Australian equities compared to both Australian bonds and international equities.

Excess performance over a short term (say 3 years) is often reversed over a longer period. Markets typically "overshoot"; more so when the relative out-performance is generated by the use of QE in offshore economies.

Thus, as Australia has now joined the crowd and also embarked on QE, our view is that our market will benefit from this policy -- just as international markets have.

However, a sobering observation (our final one in this edition) is the forward looking benefit of having a balanced portfolio that has an allocation to bonds.The following chart shows the "defensive" benefit of bonds as a risk and return offset to the volatility in equities has and is declining.

The lift in long term bond yields is predictable. A consequence is that while the outlook for equities is positive, the ability to manage portfolio volatility has become harder. For self-directed pension funds, this suggests that an increased allocation to direct property, credit and yield assets should be sought as the usefulness and return on bonds declines.

Funds operated by this manager:

Clime Australian Value Fund - Retail, Clime Internation Fund - Wholesale